Conventional Loans
What is a Conventional Loan?
A conventional mortgage loan lacks direct insurance from a government program. Additionally, most conventional loans fall under the category of “conforming” loans, meaning they adhere to the criteria set forth by Fannie Mae or Freddie Mac. These entities, government-sponsored enterprises, purchase mortgages from lenders and subsequently sell them to investors. This practice enables lenders to allocate their funds more freely, facilitating increased access to homeownership for qualified buyers.
Conventional mortgages offer various term options, with the most common choices being between 15-year and 30-year terms.
Due to the diverse guidelines encompassed by “conventional loans,” there isn’t a singular set of requirements for borrowers. Nonetheless, conventional loans generally impose stricter credit standards compared to government-backed loans like Federal Housing Administration (FHA) loans.
Conventional Loan Requirements
Like any mortgage loan, qualifying for a conventional loan entails meeting specific eligibility criteria to facilitate purchasing a home. Let’s delve into the qualifications required for this type of home loan.
Down Payment:
First-time homebuyers can secure a conventional mortgage with a down payment as low as 3%. However, the down payment requirement varies based on individual circumstances and the loan or property type:
- For non-first-time homebuyers or those earning no more than 80% of the median income in their area, the down payment requirement is 5%.
- For properties other than single-family homes (e.g., multi-unit properties), a 15% down payment may be necessary.
- Second home purchases typically necessitate a minimum 10% down payment.
- Adjustable-rate mortgages require a minimum down payment of 5%.
Private Mortgage Insurance (PMI):
If the down payment is less than 20% of the home’s value, private mortgage insurance (PMI) is mandatory. PMI safeguards mortgage investors in the event of loan default, with the cost varying based on loan type, credit score, and down payment size. PMI can be incorporated into the monthly mortgage payment, paid upfront as part of closing costs, or covered through a slightly higher interest rate. PMI can be removed once the home’s equity reaches 20% or, if the property’s value appreciates, through a new appraisal once 22% equity is attained.
Other Requirements:
Conventional lenders impose additional requirements, including:
- Credit Score: Generally, a credit score of at least 620 is necessary to qualify for a conventional loan.
- Debt-To-Income Ratio (DTI): Most conventional loans approve up to a 50% DTI, although a lower DTI enhances approval chances.
- Loan Size: Conforming conventional loans must adhere to loan limits established by Fannie Mae and Freddie Mac. In 2024, the conforming loan limit for single-family homes is $766,550, with higher limits applicable to high-cost areas such as Alaska and Hawaii, reaching up to $1,149,825.
Conventional vs Other Loan Types
Let’s examine how conventional loans stack up against some other popular loan options.
Conventional Loans Vs. VA Loans:
Conventional loans are accessible to anyone meeting the requirements, while Department of Veterans Affairs (VA) loans are exclusively available to veterans, active-duty servicemembers, and their surviving spouses.
While the eligibility criteria for VA loans mirror those of conventional loans, VA loans offer several notable benefits. Firstly, VA loans do not necessitate a down payment. Secondly, they do not require borrowers to pay mortgage insurance.
Considerations for opting for a VA loan over a conventional loan include:
- Ineligibility for purchasing a second home, as the Department of Veterans Affairs mandates that VA loan recipients reside in the property they purchase.
- The obligation to pay a funding fee, which offsets the expenses associated with VA loans. The fee, ranging from 1.25% to 3.3% of the loan amount, varies depending on factors such as down payment, type of transaction (purchase or refinance), and the number of times the VA loan benefit has been utilized.
Conventional Loans Vs. FHA Loans:
Conventional loans impose stricter credit prerequisites compared to FHA loans, which are insured by the Federal Housing Administration (FHA). FHA loans permit approval with a credit score as low as 500, provided a minimum down payment of 10% is made. For credit scores above 580, a minimum down payment of 3.5% suffices.
When deliberating between a conventional and FHA loan, the cost of mortgage insurance should be taken into account. While FHA loans entail mandatory mortgage insurance premiums for the loan’s duration if the down payment is less than 10%, conventional loans allow cancellation of mortgage insurance premiums after 11 years if the down payment is 10% or more.
Conventional Loans Vs. USDA Loans:
Conventional loans are available nationwide, whereas United States Department of Agriculture (USDA) loans can only finance properties in qualifying rural areas. USDA loans offer affordability advantages for eligible borrowers.
While conventional loans have no maximum income threshold, USDA loans impose income limits varying by location. Lenders assess household incomes to determine USDA loan eligibility.
Unlike conventional loans, USDA loans do not require borrowers to pay private mortgage insurance (PMI). However, they entail a guarantee fee, akin to PMI, which can be paid upfront (1% of the loan amount) or incorporated into monthly payments. Typically, the guarantee fee proves more cost-effective than PMI.
Conventional Loan FAQs
Explore conventional loans further by delving into common queries potential homeowners often pose about this mortgage option.
Is a termite inspection mandatory for a conventional loan?
Typically, lenders do not mandate a termite inspection when purchasing a home. However, should signs of infestation or termite damage emerge, your appraiser or home inspector might recommend engaging a pest specialist to conduct an assessment before finalizing the loan.
Can I receive assistance for the down payment with a conventional loan?
Certainly, you may qualify for down payment assistance through conventional home loans. Various government agencies and community programs extend aid to buyers grappling with challenging financial circumstances, irrespective of their chosen financing avenue.
What’s the limit on the number of conventional loans I can obtain concurrently?
Primarily, you can secure as many conventional mortgages as you can feasibly manage. Technically, individuals can hold up to ten conventional mortgages in their name. For those interested in real estate investment, alternative financing methods may facilitate the acquisition of multiple properties without necessitating numerous conventional loan applications.